1. User churn rate

As of today, a 10% user churn rate implies, 10% of the total active paying customers you had 30 days ago have canceled within the last 30 days.

2. Revenue churn rate

How much % of the revenue you are losing every month is your revenue churn rate.

Revenue Churn Rate = (MRR lost to downgrades & cancellations in the last 30 days ÷ MRR 30 days ago) x 100

As of today, a 10% revenue churn rate implies, you lost 10 % of your MRR within the last 30 days to the MRR it stood 30 days ago.

2 major causes of churn

The two main reasons that causes churn are:

Downgrades

Cancellations

Downgrades are due to customers migrating to the lower plans citing high pricing or they may be happy with the features in the lower plan.

Customers cancel their subscription if the product doesn’t work properly, the customer finds a better alternative or is unhappy due to poor customer service.

Be it any case, churn is bad.

Churn rate calculations

Based on the simplified churn rate definition at the start, we will apply the formula and see how to derive churn rate.

User churn rate calculation

Let’s say, as of 1st July 2018 you have total 100 paying customers and when you close the month on 31st July 2018 you observe only 95 from that customers paid you. It means you have lost 5 customers in the month of July. Now, we will calculate the churn rate for the month of July.

User churn rate = (5/100)*100 = 5%

Remember, even though the percentage of the churn rate varies from business to business, a 5% monthly churn rate equals to losing a substantial number of users in a year. Therefore it needs to be lowered.

Revenue churn rate calculation

Let’s say, as of 1st July 2018 you have total 100 customers each paying you $100. So your MRR becomes $10000. At the end of the month on 31st July 2018, you observed 5 customers downgraded to the $80 plan and 5 customers canceled their subscription.

This means you lost $100 (20*5) due to downgrades and $500 (100*5) due to cancellations.

MRR as on 1st July 100 x $100 = $10,000

MRR as on 31st July 10000 – (100 + 500) = $9,400

Now, we will calculate the churn rate for the month of July.

Revenue Churn Rate = [600/10000]*100 = 6%

How will you handle complex churn cases

The above example of revenue churn showed a simple calculation.

But you will add customers, lose customers, see customers migrate from one plan to another frequently.

Moreover, there will be a lot of free or unwanted users who may convert or leave the service.

You would also have customers on annual or quarterly plans.

Hence as the business grows, calculating churn rate will become a nightmare for you.

So, how would you arrive at the accurate churn rate considering all cases?

7 best tactics to reduce high churn rate

Let’s brainstorm some quick actions that can bring your churn rate down to a great extent.

Encourage annual contracts

If you convert more monthly subscriptions to yearly subscriptions, you will reduce your monthly churn rate to great extent. List down the behavior of your monthly users, where, how, when do they engage with your product and services.

Grab their attention with their interest and provide them an irresistible offer which can make them move from monthly plan to yearly plan.

Reduce the delinquency rate

Delinquency is related to credit card payment failures. There are many reasons why credit card payments fail so try and get your online payment mechanism work seamlessly. It will boost a great user experience as well which is one of the best practices for reducing the churn rate.

Improved communication

Be it sending a welcome email to the customer or addressing any grievance, keep all channels of communication open to him. Make sure to sympathize in case of a trouble and always be courteous in the conversation.

Prompt customer service

Customer service is about promptness, transparency, and action. Adhere to the timeline to get back, be transparent in policies, never hide anything from the customer and make sure to get his issue resolved ASAP with the help of teams.

Identify market needs and innovate

Often your competitor introduces better features and service before you do and this can lead your customers to switch to your competitor. Be innovative and always find out the market needs which keep changing. Observing your competitor’s move constantly can help you to be in the league.

Incentivise loyal customers

Appreciate customers’ loyalty towards you and never disappoint them. You can offer them exclusive deals, special discounts or upgrades which can motivate them to a greater extent and retain for a longer time.

Create tailored approach

Create different strategies for loyal customers, for newly signed up customers and for free users if they seem to be opting out of your product.

Going further, we will see average churn rates across industries and understand a short case study on Netflix’s churn rate. These would help us in reflecting on our learning on churn.

Churn Rate by Industry

There are various factors that affect the churn rate and every industry is also different in its approach in tackling the churn issue. The chart below is populated by Recurly.com where you will find that roughly 6% to 12% yearly churn rate seems normal across different industries.

Case Study: How did Netflix manage to keep its churn rate low?

Netflix captured 52% of the broadband households in the US, while Amazon Prime 24% at the end of 2015.

In case of Netflix, 9% of customers canceled their subscription including those who were on trial period, while in the case of Hulu and Amazon Prime, its competitors, the churn rate was 14% and 19% respectively.

The key success factor for Netflix, Hulu and Amazon Prime – Original Content.

From the above data, we could easily transcend one assumption that subscribers were more loyal towards Netflix due to its high engagement in the original content and therefore it continued to invest heavily in feature films, kids show, documentaries and stand-up comedy shows.

Conclusion

Churn is bad! You constantly need to improve your product, user experience, customer service and be active in the market. Still, there will be some who won’t like you and it is ok. You have to observe your customer’s behavior constantly and act upon it to sustain them.

And to observe your customer’s behavior and keep a check on your churn rate, use Putler.